Gold is at an all-time high.
And this must mean something and probably nothing good
considering gold's long-held association with fear,
hoarding, inflation, and, to exaggerate slightly,
the collapse of the modern monetary system.
So why is the yellow metal so strong?
To begin with, gold is priced in dollars.
And the dollar has recently hit a two-year low.
So the question becomes, why is the dollar weak?
And the standard explanation for this
is low expected US economic growth.
This in turn depresses interest rates and bond yields,
diminishing investors' demand for dollars
with which to buy US assets.
And indeed, as we can see, bond yields
are stuck at a very low level, but it is worse than that.
Not only are bond yields low, but at the same time,
inflation expectations are rising
as the Federal Reserve keen to protect the American economy
is printing dollars and cramming them into the US economy.
This means that real yields, that
is, yields after inflation, are not just low.
They are falling.
And when real yields fall, gold which yields nothing
at all almost always rises.
So all of these factors fit together.
Gold, the dollar, bond yields, inflation expectations,
falling real yields - they all make a certain logical sense.
Should we therefore be buying gold today?
Well, in order for gold's ascent to continue,
real yields have to continue to fall.
This requires that inflation expectations
keep going up at the same time as low growth expectations keep
nominal yields pinned right where they are.
This is the dreaded stagflation.
Back in 2011, in the last crisis, like today,
the Fed was intervening strongly in a sluggish economy
and Washington was in turmoil.
Investors then made the same bet on stagflation and gold.
As it turns out, they were wrong.
The price of gold got cut in half
in the years that followed.
In fact, all predictions of inflation since the last crisis
have turned out to be similarly wrong.
And all efforts by the Federal Reserve
to get inflation up to its two per cent target have failed.
So a bet on stagflation and gold now
is a bet against recent history.
That many investors are willing to take that wager shows just
how frightened they really are.